Trusts in Family Law

Introduction

Family trusts are commonly used structures for asset protection, tax planning, and wealth preservation. However, when relationships break down, trusts can complicate property settlements. Understanding how courts treat trust assets is crucial for fathers involved in family law proceedings where trusts are involved.

What is a Trust?

A trust is a legal arrangement where one person (the trustee) holds property for the benefit of others (the beneficiaries). The key parties are:

• Settlor: Person who establishes the trust
• Trustee: Person or company that manages the trust
• Beneficiaries: People who can benefit from the trust
• Appointor: Person who can remove/appoint trustees

Types of Trusts in Family Law

How Courts Approach Trust Assets

The Ashton Principle

From the landmark case Ashton v Ashton, courts consider:

• Whether a party has control over trust assets
• The reality of the trust arrangement
• Whether the trust is a "sham" or genuine
• The practical ability to access trust assets

Key Factors Courts Consider

• Control: Who really controls the trust?
• Benefit: Who actually benefits from the trust?
• Contributions: Who contributed to trust assets?
• Use: How are trust assets actually used?
• Documentation: Are trust documents followed?

When Trust Assets May Be Included

Circumstances for Inclusion

• Party is trustee and has effective control
• Party is appointor with power to remove trustees
• Trust assets used for personal benefit
• Trust operates as personal asset pool
• Contributions made from relationship assets
• Trust documents not properly followed

The "Add Back" Approach

Courts may "add back" trust assets to the property pool if:

• Assets were transferred to avoid property settlement
• Trust was established during relationship
• Relationship funds used to acquire trust assets
• Trust benefits primarily one party

Valuing Trust Interests

Challenges in Valuation

• No automatic entitlement to trust assets
• Discretionary nature of distributions
• Contingent interests difficult to value
• Market for trust interests may not exist

Valuation Approaches

• Net asset approach: Value of underlying assets
• Income approach: Present value of expected distributions
• Market approach: Comparable sales (rarely available)
• Discount approach: Reduced value due to lack of control

Trust Structures and Control

Trustee Powers

• Investment decisions
• Distribution decisions
• Asset management
• Day-to-day operations

Appointor Powers

• Remove and appoint trustees
• Ultimate control over trust
• May be more significant than trustee role
• Often overlooked but crucial

Common Trust Issues in Family Law

Business Trusts

• Family business operated through trust
• Difficulty separating business from personal assets
• Valuation challenges for ongoing businesses
• Impact on business operations

Property Investment Trusts

• Real estate held in trust structure
• Tax benefits vs family law complications
• Mortgage and financing issues
• Capital gains tax implications

Protective Trusts

• Established to protect assets from creditors
• May also protect from family law claims
• Courts scrutinize protective intent
• Timing of establishment important

Strategies for Dealing with Trusts

For Trust Controllers

• Maintain proper trust documentation
• Follow trust deed requirements
• Keep clear records of trust vs personal assets
• Consider restructuring before separation
• Obtain expert valuations

For Non-Controllers

• Investigate trust structures thoroughly
• Examine actual control and benefit
• Trace contributions to trust assets
• Challenge artificial arrangements
• Seek court orders for disclosure

Disclosure Obligations

What Must Be Disclosed

• Trust deeds and amendments
• Financial statements
• Distribution records
• Minutes of trustee meetings
• Tax returns
• Bank statements

Third Party Disclosure

• Subpoenas to trustees
• Accountant records
• Legal advisor files
• Bank records

Court Orders Affecting Trusts

Types of Orders

• Orders for sale of trust assets
• Orders for distribution of trust income
• Orders removing trustees
• Orders appointing new trustees
• Orders for trust restructure

Limitations on Court Powers

• Cannot override valid trust structures
• Must respect genuine third party interests
• Cannot force distributions to non-beneficiaries
• Limited by trust deed terms

Tax Implications

Capital Gains Tax

• Trust asset sales may trigger CGT
• Distribution of assets may have CGT consequences
• Beneficiary vs trustee liability
• Rollover relief may be available

Income Tax

• Trust income distribution rules
• Beneficiary assessment
• Trustee assessment at penalty rates
• Streaming of different income types

Practical Considerations

Timing Issues

• When was trust established?
• When were assets transferred to trust?
• Relationship to separation timing
• Evidence of asset protection motive

Family Dynamics

• Extended family involvement
• Children as beneficiaries
• Multiple generation interests
• Family business considerations